Banks have to increase paid up capital gradually within six years, Basel III to replace Basel II
The banks will have to increase their paid up capital withing next six years as the central bank is planning to implement the Basel III to minimise the market risk.
The paid up capital for the new commercial banks will be Rs 5 billion, under the Basel III requirement as they have to increase minimum capital, equity capital ratio and buffer capital. Currently, they have to have Rs 2 billion paid up capital. They have to gradually increase the paid up capital like in the next two years, they have to increase their paid up capital to Rs 3 billion, in five years Rs 4 billion and six years, Rs 5 billion. “It is expected to make the banks stronger,” the central bank said, adding that the development banks also have to be ready to implement Basel III, though its implemented for the commercial banks only in the beginning.
After the successful six years of the Basel II in commercial banks, the new challenges have called for the Basel III that is going to bring changes in the capital adequacy framework, the central bank said.
There were three pillars – minimum capital require, supervisory review and disclosure – under the capital adequacy framework of Basel II, but after the global financial crisis, there has been significant addition.
There were challenges towards managing risk within the banking system as well as reducing the spillover risk from the financial sector to the real economy. Basel Committee on Banking Supervision (BCBS) issued ‘Basel III: A global regulatory framework for more resilient banks and banking systems’ in December 2010. Basel III has set its objectives to improve the shock absorbing capacity of each and every individual bank as the first order of defense. In addition to the measures, the efforts were directed to ensure that banking system as a whole does not weaken and its spillover impact on the real economy is minimised.
Thus central bank has also planned to implement the Basel III – after consultation with the banks and financial institutions – in s month to safeguard the financial system, the Nepal Rastra Bank said.
Basel III has included some micro-prudential elements – like definition of capital, better risk coverage, leverage ratio and international liquidity framework – so that risk is managed in each individual institution and macro-prudential elements will take care of issues relating to the systemic risk.
Likewise, the leverage ratio has been proposed at three per cent and capital conservation buffer 2.5 per cent of risk weighted average to strengthen the banks and financial institutions.
Similarly, counter cyclical capital buffer has also been proposed to 2.5 per cent apart from a forward looking and dynamic provisioning, and addressing systemic risk and interconnectedness. “The capital requirement has also been doubled,” it said, adding that Tier 1 and Tier 2 capital has also been increased.
The new arrangements calls for an increase in paid up capital, according to the central bank.